Tag Archives: #riskon

Lest ‘Flation Has Spice

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The market absorbed CPI
And equities started to fly
Though Core prices rose
T’was Headline, I s’pose
Encouraged investors to buy
 
As well, Fed funds futures now price
The Fed will cut rates this year thrice
The upshot’s the buck
Is down on its luck
Beware though, lest ‘flation has spice

 

Core prices rose a bit more than forecast in yesterday’s CPI report although the headline numbers were a touch softer.  The problem for the Fed, if they are truly concerned about the rate of inflation, is that the strength of the numbers came from core services less shelter, so-called Supercore, a number unimpeded by tariffs, and one that has begun to rise again.  As The Inflation Guy™ makes clear in his analysis yesterday, it is very difficult to look at the data and determine that 2% inflation is coming anytime soon.  I know the market is now virtually certain the Fed is going to cut in September, but despite President Trump’s constant hectoring, I must admit the case for doing so seems unpersuasive to me.

Here are the latest aggregated probabilities from the CME and before you say anything, I recognize the third cut is priced in January, but you need to allow me a little poetic license!

However, since I am just a poet and neither institutions nor algorithms listen to my views, the reality on the ground was that the lower headline CPI number appeared to be the driver yesterday and into today with equities around the world rallying in anticipation of Fed cuts.  As well, the dollar is under more severe pressure this morning on the same basis.  However, it remains difficult for me to look at the situation in nations around the world and conclude that the US economy is going to underperform in any meaningful way over time.  

So, to the extent that a currency’s relative value is based on long-term economic fundamentals, it is difficult to accept that the dollar’s relative fiat value will decline substantially, and permanently, over time.  I use the euro as a proxy for the dollar, which is far better than the DXY in my opinion as the Dollar Index is a geometric average of 6 currencies (EUR, JPY, GBP, CAD, SEK and CHF) with the euro representing 57.6% of the basket.  And I assure you that in the FX markets, nobody pays any attention to the DXY.  Either the euro or the yen is seen as the proxy for the “dollar” and its relative value.  At any rate, if we look at a long-term chart of the euro below, we see that the twenty-year average is above the current value which pundits want to explain as a weak dollar.  Too, understand that back in 1999, when the euro made its debut, it started trading at about 1.17 or so, remarkably right where it is now!

Source: finance.yahoo.com

My point is that the dollar remains the anchor of the global financial system, and given the current trends regarding both economic activity and the likely ensuing central bank policies, as well as the ongoing performance of US assets on a financial basis, while short-term negativity on the dollar can be fine, I would be wary of expecting it to lose its overall place in the world.

Speaking of short-term views, especially regarding central bank activities, it appears clear that the market is adjusting the dollar’s value on this new idea of the Fed cutting more aggressively.  If that is, in fact, what occurs, I accept the dollar can decline relative to other currencies, but I really would be concerned about its value relative to things like commodities.  And that has been my view all along, if the Fed does cut rates, gold is going to be the big beneficiary.

Ok, let’s review how markets have absorbed the US data, as well as other data, overnight.  Yesterday’s record high closings on US exchanges were followed by strength in Tokyo (+1.3%), Hong Kong (+2.6%), China (+0.8%) despite the weakest domestic lending numbers in the history of the series back to 2005.  In fact, other than Australia (-0.6%) every market in Asia rallied.  The Australian story was driven by bank valuations which some feel are getting extreme despite the RBA promising further rate cuts, or perhaps because of that and the pressure it will put on their margins.  Europe, too, is rocking this morning with gains across the board led by Spain (+1.1%) although both Germany (+0.9%) and France (+0.6%) are doing fine.  And yes, US futures are still rising from their highs with gains on the order of 0.3% at this hour (7:45).

In the bond market, Treasury yields have slipped -3bps this morning, with investors and traders fully buying into the lower rate idea.  European sovereigns are also rallying with yields declining between -4bps and -5bps at this hour.  JGBs are the exception with yields there edging higher by 2bps, though sitting right at their recent “home” of 1.50%.  as you can see from the chart below, 1.50% appears to be the market’s true comfort level.

Source: tradingeconomics.com

In the commodity space, oil (-0.6%) continues to slide as hopes for an end to the Russia-Ukraine war rise ahead of the big Trump-Putin meeting on Friday in Alaska.  Nothing has changed my view that the trend here remains lower for the time being as there is plenty of supply to support any increased demand.

Source: tradingeconomics.com

Metals, meanwhile, are all firmer this morning with copper (+2.6%) leading the way although both gold (+0.4%) and silver (+1.7%) are responding to the dollar’s decline on the day.

Speaking of the dollar more broadly, its decline is pretty consistent today, sliding between -0.2% and -0.4% vs. almost all its counterparts, both G10 and EMG.  This is clearly a session where the dollar is the driver, not any particular story elsewhere.

On the data front, there is no primary data coming out although we will see the weekly EIA oil inventory numbers later this morning with analysts looking for a modest drawdown.  We hear from three Fed speakers, Bostic, Goolsbee and Barkin, with the latter explaining yesterday that basically, he has no idea what is going on and no strong views about cutting or leaving rates on hold.  If you ever wanted to read some weasel words from someone who has an important role and doesn’t know what to do, the following quote is perfect: “We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear.  As the visibility continues to improve, we are well positioned to adjust our policy stance as needed.”  

And that’s all there is today.  The dollar has few friends this morning and I see no reason for any to materialize today.  But longer term, I do not believe a dollar weakening trend can last.

Good luck

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Over the Hump

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It’s beautiful and it’s quite big
Though more complicated than trig
But President Trump
Got over the hump
Though sans views that he is a Whig
 
As well, Friday’s Canada rift
Has ended, boy that was sure swift
Now, this week we’ll learn
If there’s still concern
‘Bout jobs, or if there’s been a shift

 

The weekend news revolves around the fact that the Senate has passed the BBB with a 51-49 vote, and it now moves to committee so both Houses of Congress can agree the final details before it gets to President Trump’s desk for signature and enactment.  This is another victory for the President, adding to last week’s wins and remarkably there have been several others as well.  The Supreme Court ended the ability of a single district court judge to injunct the entire nation based on a single case, a move that will prevent judges who disagree with the president from stopping his policy efforts.  Then, Canada announced they were going to impose a tax on US technology companies (the one that the Europeans just killed) and after Mr Trump ended the trade dialog quite vociferously, Canada backed down from that stance and is back at the negotiating table.

I mention this not to be political but as a backdrop to what is helping to drive the improved sentiment in US markets for both equities and bonds.  While a quick look at YTD performances of US equity indices vs. Europeans shows the US still lags, that gap is narrowing as the news cycle continues to point to positive things happening in the US.  Certainly, my understanding of the BBB is that it is quite stimulative, although it is changing priorities from the previous administration.

More interestingly, the Treasury market, which has been the subject of many slings and arrows lately from the part of the analyst community that continues to worry about refinancing the growing US debt pile, continues to behave remarkably well.  A quick look at the chart below shows that 10-year yields have been trending lower for the past 6 months, at least, and this morning are continuing that trend, slipping another -3bps.

Source: tradingeconomics.com

My point is that despite relentless doom porn regarding the economy, the big picture continues to point to ongoing growth in economic activity.  There are many anecdotes regarding the impending weakness, (the latest I saw was the increase in the number of credit card purchases that have been rejected is rising rapidly) and yet, the main data has yet to crack and roll over to point to a clear sign of significant slowing.  Perhaps this week when the NFP report is released on Thursday (Friday is July 4th holiday), we will see that long-awaited decline.  However, as of this morning, the Fed funds futures market continues to price just a 21% probability of a July rate cut as forecasts for NFP show the median to be 110K. 

While I completely understand the concerns that the doomers recite, I have come to understand that the idea of a recession is a policy choice, not a natural phenomenon.  While in the past, the business cycle was more powerful than the government, that is no longer the case.  Rather, what we have observed over the past 15 years at least, since the GFC and the onset of QE, is that the government has become a large enough part of the total economy to drive it at the margin.  And I assure you, if a recession is a policy choice, there is not a politician that is going to choose one.  Perhaps we will reach a point where the imbalances get beyond the control of the central banks and their finance ministries, but we are not there yet.

Ok, let’s take a peek at the overnight price action.  Despite all the spending promises by governments around the world, yields have slipped everywhere with all European sovereigns taking their lead from the US and lower this morning by -2bps to -3bps.  Even JGB yields (-1bp) have managed to decline slightly.  If inflation fears are building, they are not obvious this morning.

In the equity markets, Friday’s US rally was followed by most Asian bourses rising (Nikkei +0.8%, Australia +0.3%, China +0.4%) although HK (-0.9%) slipped after Chinese PMI data was released that indicated things weren’t collapsing, but that future monetary stimulus may not be coming after all.  The worst of both worlds for stocks.  Meanwhile, European exchanges are mostly a touch softer, but only on the order of -0.2%, so really very little changed amid light volume overall.  Interestingly, US futures are solidly higher at this hour (7:00), rising by 0.55% across the board.

In the commodity markets, oil (-0.35%) is slipping a bit, but is basically hanging around near its recent lows as the market remains unconcerned about an escalation of fighting between Iran and Israel and any possible closure of the Strait of Hormuz.  Meanwhile, gold (+0.4%) is bouncing from a weak performance Friday which appears to have been a bit oversold, although copper and silver are not following suit this morning with the former (Cu -0.7%) the laggard.  However, all the metals remain sharply higher this year and in strong up trends.

Finally, the dollar is modestly softer again this morning with KRW (+0.9%) the biggest mover, by far, while the entire G10 complex is showing gains on the order of 0.1% to 0.2%.  This trend lower in the dollar remains strong (see chart below), but as I continue to remind everyone, we are nowhere near an extreme valuation in the dollar.  If, and it’s a big if, we see substantial weakening in the employment data, I think the Fed could decide to act and that would increase the speed of the downtrend (as well as goose inflation higher), but absent that, I do not see a sharp decline, rather a slow descent.  Remember, this is exactly what Trump and Bessent want, a more competitive dollar for the manufacturing sector.

Source: tradingeconomics.com

As it is the first week of the month, there is plenty of data to digest.

TodayChicago PMI43.0
TuesdayISM Manufacturing48.8
 ISM Prices Paid69.0
 JOLTs Job Openings7.3M
WednesdayADP Employment 85K
ThursdayNonfarm Payrolls110K
 Private Payrolls110K
 Manufacturing Payrolls-6K
 Unemployment Rate4.3%
 Average Hourly Earnings0.3% (3.9% y/Y)
 Average Weekly Hours34.3
 Participation Rate62.3%
 Initial Claims240K
 Continuing Claims1960K
 ISM Services50.5
 Factory Orders8.0%
 -ex Transport0.9%

Source: tradingeconomics.com

In addition to the payrolls, we hear from Chairman Powell again on Tuesday and Atlanta Fed president Bostic twice.  I guess the rest of the FOMC took a long holiday week(end).

As it’s a holiday week, I expect that activity will be light, although headline bingo remains a key part of the markets today.  I feel like the trends are well entrenched though, with the dollar slipping, equities and commodities rallying and bonds currently leaning toward lower yields, although that seems out of sync with the other markets.  But in the summer, with less liquidity and activity, anomalies can continue for a while.

Good luck

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Full Schmooze

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The temperature’s starting to fall
With Israel and Iran’s brawl
On hold for the moment
Though either could foment
Resumption, and break protocol
 
But that truce combined with the news
That Trump’s team are pushing full schmooze
On trade, has the markets
Increasing their bull bets
While skeptics are singing the blues

 

President Trump is having a pretty remarkable week.  The successful attack and destruction of Iran’s nuclear enrichment facilities combined with the news that the US and China have agreed the details of the trade framework that was outlined in Geneva and followed up in London has market participants feeling a lot better about the world this morning.  Add to that the news that a particularly onerous part of the BBB, Section 899, which was nicknamed the Revenge clause for its tax targeting anybody from nations that imposed excess taxes on US companies internationally, being stripped after negotiations with European leaders, and the fact that NATO has gone all-in on increasing their spending, and Mr Trump must be feeling pretty good this morning.  Certainly, most markets are feeling that, except those that thrive on chaos and fear, like precious metals.

In fact, this morning it seems that the entire discussion is a rehash of what has occurred all week with very little new added to the mix.  Data from the US yesterday was mixed, with Claims a bit softer and Durable Goods quite strong while the third look at Q1 GDP was revised lower on more trade data showing imports were greater than first measured while Consumer Spending and Final Sales were a bit weaker than expected.  Net, there was not enough to push a view of either substantial strength or weakness in the economy, so investors and their algorithms continue to buy shares.

The other story that continues to get airplay is the pressure on Chairman Powell and questions about whether at the July meeting Fed governors are going to vote against the Chairman.  Apparently, it has been 32 years since that has occurred (and you thought they were actual votes!) and the punditry is ascribing the dissent to politics, not economics.  It should, of course, be no surprise that there is a political angle as there is a political angle to every story these days, but the press is particularly keen to point out that the two most vocal Fed governors discussing rate cuts were appointed by Trump.

However, despite all the talk, the futures market does not appear to have adjusted its opinion all that much as evidenced by the CME chart of probabilities below.  In fact, over the past month, the probability of a cut has declined slightly.  Rather, I would contend that on a slow news Friday, the punditry is looking for a story to get clicks.

The last story of note is about the dollar and its ongoing weakness.  This is an extension of the Fed story as there is alleged concern that if the Fed is perceived to lose some of its independence, that will be a negative for the dollar in its own right, as well as the fact that the loss of independence would be confirmed by a rate cut when one is not necessary (sort of like last autumn prior to the election.  Interestingly, I don’t recall much discussion about the Fed’s loss of independence then.)

But, in fairness, the dollar has continued to decline with the euro trading to its highest level, above 1.17, in nearly four years.  It is hard to look at the story in Europe and think, damn, what a place to invest with high energy costs and massive regulatory impediments, so it is reasonable to accept that what had been a very long dollar position is getting unwound.  But look at the next two charts (source: tradingeconomics.com) of the euro, showing price action for one year and for five years, and more importantly notice the trend lines that the system has drawn.  There is no doubt the dollar is under pressure right now, but I am not in the camp that believes this is the beginning of the end of the dollar’s global status.  Remember, too, that President Trump would like to see the dollar soften to help the export competitiveness of the US, and so I would not expect to hear anything from the Treasury on the matter.

However, while these medium and long-term trends are clear, the overnight session was far less exciting with the largest move in any major currency the ZAR (+0.5%) which is despite the decline in gold and platinum prices.  Otherwise, today’s movement is basically +/- 0.2% across both G10 and EMG currencies.

Speaking of the metals, though, they are taking it on the chin this morning as we approach month end and futures roll action.  Gold (-1.3%), silver (-1.7%), copper (-0.9%) and platinum (-4.4%) are all under pressure, although all remain significantly higher YTD.  However, to the extent that they represent a haven and the fact that havens seem a little less necessary this morning seems to be the narrative driver adding to the month end positioning.  Meanwhile, oil (+0.5%) continues to bounce ever so slowly off the lows seen immediately in the wake of the bombing attacks.

Circling back to equity markets, after a nice day in the US yesterday, with gains across the board approaching 1% and the S&P 500 pushing to within points of a new all-time high, Japan (+1.4%) followed suit as did much of the region (India, Taiwan, New Zealand, Indonesia) but China (-0.6%) and Hong Kong (-0.2%) didn’t play along.  Europe, though, is having a positive session with gains ranging from 0.65% (DAX) to 1.3% (CAC) and everything in between.  It seems that the NATO spending news continues to support European arms manufacturers and the cooling of tensions in the Middle East has lessened energy concerns.  US futures are also bright this morning, up about 0.5% at this hour (7:40).

Finally, bond markets are selling off slightly after a further rally yesterday and yields since the close have risen basically 3bps in both Treasury and European sovereign markets.  There is still no indication that any government is going to stop spending, rather more increases are on the horizon, but there is also no indication that central banks are going to stop supporting this action.  No central bank is going to allow their nation’s bond market to become unglued, regardless of the theories of what they can do and what they control.  Ultimately, they control the entire yield curve.

On the data front, this morning brings Personal Income (exp 0.3%), Personal Spending (0.1%) the PCE data (Core 0.1%, 2.6% Y/Y; Headline 0.1%, 2.3% Y/Y) and at 10:00 Michigan Consumer Sentiment (60.5) and Inflation Expectations (1yr 5.1%, 5yr 4.1%).  There are several more Fed speakers, including Governor Cook, a Biden appointee who is a very clear dove, but has not yet agreed that rate cuts make sense.  It will be interesting to see what she has to say.

It is a summer Friday toward the end of the month.  Unless the data is dramatically different than forecast, I expect that the dollar will continue to slide slowly for now, although I do expect the metals complex to find a bottom and turn.  As to equities, apparently there is no reason not to buy them!

Good luck and good weekend

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The World is Aghast

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At one time, not long in the past
New York was a finance dynast
But yesterday’s vote
Does naught to promote
Its future. The world is aghast
 
As well, yesterday, Chairman Jay
Had nothing of note new to say
He’s watching quite keenly
And somewhat serenely
But rate cuts are not on the way

 

I must start this morning on the results from the NYC mayoral primary election where Zohran Kwame Mamdani won the Democratic primary and is now favored to win the general election.  His main rival was former NY state governor, Andrew Cuomo, a flawed man in his own right, but one with the usual political peccadillos (greed, grift and sexual misconduct).  Mamdani, however, is a confirmed socialist whose platform includes rent freezes, city owned grocery stores (to keep costs down) a $30/hour minimum wage (not sure how that will keep grocery prices down) and a much higher tax rate, especially on millionaires.  In addition, he wants to defund the police.  Apparently, his support was from the younger generations which is a testament to the failures of the education system in the US, or at least in NYC.

I mention this because if he does, in fact, become the mayor of NYC, and can enact much of his agenda, the financial markets are going to be interrupted in a far more dire manner than even Covid or 9/11 impacted things.  I expect that we will see a larger and swifter exodus from NYC of both successful people and companies as they seek other places that are friendlier to their needs.

Now, even though he is running as a Democrat, it is not a guarantee that he will win.  Current mayor, Eric Adams is running as an independent, and while many in the city dislike him, he may seem to be a much better choice for those somewhere in the middle of the spectrum.  As well, even if he wins, his ability to enact his agenda is not clear given his inexperience and lack of connections within the city’s power centers. Nonetheless, it is a real risk and one that needs to be monitored closely.  

As to Chairman Powell, as well as the other six FOMC members who spoke yesterday, the generic view is that while policy may currently be slightly tight, claimed to be 25bps to 50bps above neutral across all of them, they are in no hurry to adjust things until they have more clarity regarding the impact of tariffs on inflation and the economy.  They paid lip service to the employment situation, explaining that if things took a turn for the worse there, it would change the calculus, but right now, they’re pretty happy.  It can be no surprise that there were zero deep questions from the Senate committee members, and I expect the same situation this morning when he sits down in front of the House.  

Since the cease fire between Iran and Israel seems to be holding, market participants are now searching for the next catalyst for market movement.  In the meantime, let’s look at how things are behaving.  The “peace’ in the Middle East saw the bulls return with a vengeance yesterday in the US, with solid gains across all major indices, but the follow through was less robust.  While Chinese shares (Hang Seng +1.2%, CSI 300 +1.4%) both fared well, the Nikkei (+0.4%) was less excited and the rest of the region was more in line with Japan than China, mostly modest gains.  From Japan, we heard from BOJ member Naoki Tamura, considered the most hawkish, that raising interest rates was necessary…but not right away.  That message was not very well received.

However, Europe this morning is on the wrong side of the ledger with Spain’s IBEX (-1.25%) leading the way lower although other major bourses are not quite as poorly off with the DAX (-0.4%) and CAC (-0.2%) just drifting down.  NATO is meeting in The Hague, and it appears that they are finalizing a program to spend 5% of respective national GDP’s on defense, a complete turnaround from previous views.  This is, of course, one reason that European bond markets have been under pressure, but I expect it would help at least portions of the equity markets there given more government spending typically ends up in that bucket eventually.  As to US futures, at this hour (7:10) they are little changed to slightly higher.

In the bond market, US Treasury yields continue to slide, down another -1bp this morning and now under 4.30%.  Despite President Trump’s hectoring of Chairman Powell to lower Fed funds, perhaps the fact that Powell has remained firm has encouraged bond investors that he really is fighting inflation.  It’s a theory anyway, although one I’m not sure I believe.  European sovereigns have seen yields edge higher this morning, between 1bp and 2bps as the spending promises continue to weigh on sentiment.  However, even keeping that in mind, after the spike in yields seen in early March when the German’s threw away their debt brake, European yields have essentially gone nowhere.

Source: tradingeconomics.com

While this is the bund chart, all the major European bond markets have tracked one another closely.  Inflation in Europe has fallen more rapidly than in the US and the ECB’s base rate is sitting 200bps below Fed funds, so I suppose this is to be expected.  However, if Europe actually goes through with this massive military spend (Spain has already opted out) I expect yields on the continent to rise.  €1 trillion is a quite significant ask and will have an impact.

Moving to commodity markets, after its dramatic decline yesterday, oil (+0.8%) is bouncing somewhat, but that is only to be expected on a trading basis.  Again, absent the closure of the Strait of Hormuz, I suspect that the supply/demand dynamics are pointing to lower prices going forward, at least from these levels.  In the metals markets, gold (+0.15%) which sold off yesterday as fear abated, is finding its footing while silver (-0.5%) is slipping and copper is unchanged.  It feels like metals markets are looking for more macroeconomic data to help decide if demand is going to grow in the near term or not.  A quick look at the Atlanta Fed’s GDPNow estimates for Q2 show that growth remains quite solid.

Source: atlantafed.org

However, another indicator, the Citi Economic Surprise Index, looks far less promising as it has moved back into negative territory and has been trending lower for the past 9 months.

Source: cbonds.com

At this point, my take is a great deal depends on the outcome of the BBB in Congress and if it can get agreed between the House and Senate and onto President Trump’s desk in a timely manner.  If that does happen, I think we are likely to see sentiment increase, at least in the short term.  That should help all economically sensitive items like commodities.

Finally, the dollar is modestly firmer this morning, rebounding from yesterday’s declines although still trending lower.  The price action this morning is broad based with modest moves everywhere.  The biggest adjustment is in JPY (-0.6%) but otherwise, 0.2% pretty much caps the movement.  Right now, the dollar is not that interesting, although I continue to read a lot about how it is losing its luster as the global reserve currency.  There is an article this morning in Bloomberg explaining how China is trying to take advantage of the current situation to globalize the yuan, but until they open their capital markets, and not just for $50K equivalents, but in toto, it will never be the case.

On the data front, aside from Chair Powell’s House testimony, we see New Home Sales (exp 690K) and then EIA oil inventories with a modest draw expected there.  There are no other Fed speakers and certainly Powell is not going to change his tune.  To my eyes, it is setting up as a very quiet session overall.

Good luck

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Terribly Keen

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The evidence, so far, we’ve seen
Is nobody’s terribly keen
To stop all the shooting
In wars, or the looting
In riots, at least so I glean
 
But can stocks and bonds still maintain
The heights they consistently gain
Or will, one day soon
Risk assets all swoon
As traders turn to their left-brain?

 

I am old enough to remember when Israel’s attack on Iranian nuclear facilities was considered a risk to global financial assets.  Equity prices fell around the world as investors scrambled to find havens to protect their assets.  Alas, these days, the only haven around seems to be gold as Treasury yields, after an initial slide, rebounded which implies investors may have questioned their safety and the dollar, after a slight bump, slipped back.

But that is clearly old-fashioned thinking as evidenced by the fact that fear is already ebbing in markets with equities rebounding this morning, the dollar under pressure and both gold and oil slipping slightly.  Now, it is early days but a look at the chart below of oil shows that it took about 9 months for oil prices to retrace to their pre-Russia invasion levels.  Obviously, this situation is different than that from the perspective that prior to Russia’s invasion, there were no energy market sanctions while Iran has been subject to sanctions for years.  However, the larger point is that the market, at least right now, seems to have adjusted to what it believes is the appropriate level to account for changes in production.

Source: tradingeconomics.com

Now, as of January 2025, at least as per the data I could find, Russia produces 10.7 million barrels/day while Iran clocks in at just under 4 million.  As well, given the sanctions, much of Iran’s production has a limited market, with China being the largest importer.  I’m simply trying to highlight that Russia’s production was much larger and more critical to the oil market overall, so a larger impact would be expected.  However, the fact that Israel continues to destroy Iranian infrastructure, and has targeted oil infrastructure as well as nuclear infrastructure, suggests there could easily be more impacts to come.  This is especially true if Iran seeks to close the Strait of Hormuz, a key bottleneck exiting the Persian Gulf and where some 20% of global oil production transits daily.

But the market is sanguine about these risks, at least for now.  There is no indication that Israel has completed what they see as their mission, and that means things could well escalate from here.  In that case, I would expect another jump in oil prices, but overall, it is not hard to believe that we have seen the bulk of any movement.  It strikes me that we will need substantially stronger economic activity to push oil prices much higher from here, and that seems unlikely right now.

Meanwhile, near Banff there’s a meeting
Where heads of state are all competing
To help convince Trump
There will be a slump
Unless tariff pressures are fleeting

The other noteworthy story this morning is the G-7 meeting that is being held in Kananaskis, Alberta, near Calgary and Banff and how all the other members of the club, as well as invitees from Mexico, Brazil, South Africa, India and South Korea, will be trying to convince the president that his tariffs are going to be too damaging and need to be adjusted or removed, at least for their own nations.

Anyone who indicates they know how things will evolve is offering misinformation as Trump’s mercurial nature precludes that from being the case.  However, it would not be inconceivable for some headway to be made by some of these nations in certain areas although President Trump does appear to strongly believe tariffs are a benefit by themselves.  I am not counting on any major breakthroughs here, but small victories are possible.

One last thing before the market recap though, and this was a Substack piece I read this weekend from The Brawl Street Journal, that, frankly, shocked and scared me regarding the ECB and some plans they are considering.  While President Trump has consistently called the climate hysteria a hoax and his administration is doing everything it can to remove Net Zero promises and CO2 reduction from anything the government does, the opposite is the case in Europe.  The frightening part is that the ECB is considering adding effective mandates to lending criteria such that loans to support agriculture or fossil fuel production will require banks to hold more capital, making them more expensive.  The very obvious result is there will be less loans in this space, and things like agriculture and fossil fuel production will become scarcer in Europe than elsewhere.  

Yes, this is suicidal, but then we have already seen Germany (and the UK) attempt to commit economic suicide with its energy policy, and while many in Europe would suffer the consequences, I assure you the members of the ECB would not be in that group.  But my point, overall, is that if this plan is enacted, and the target date appears to be this autumn, it is a cogent reason for the euro to begin a structural decline to much lower levels.  This is not for today, but something to remember if you hear that the NVaR (Nature Value at Risk) plan is enacted.  Tariffs will be their last concern as the continent enters a long-term economic decline as a result.  The blackout in Spain in April will become the norm, not the unusual circumstance.

Ok, let’s see how little investors are concerned about war and escalation.  While equity markets were lower around the world on Friday, that is just not the case anymore.  Asia saw the Nikkei (+1.3%) lead the way higher with the Hang Seng (+0.7%) and CSI 300 (+0.25%) also gaining as well as strength in Korea (+1.8%) and India (+0.8%) as hopes rise some positive news will come from the G-7.  Europe, too, has seen gains across the board led by Spain (+0.9%) and France (+0.7%) with most other markets rising between 0.3% and 0.5%.  As to US futures, at this hour (6:50) they are higher by about 0.5% with the NASDAQ leading the way.

In the bond market, Treasury yields are backing up a further 3bps this morning but are still just above 4.40%.  European yields are +/- 1bp across the board as investors try to decipher ECB commentary about the next rate move.  The universal belief is there will be another cut, although Bundesbank president Nagel tried to pour cold water on that thesis this morning calling for caution and a meeting-by-meeting approach going forward.

Commodity markets, are of course, the real surprise this morning with oil (-1.1%) looking like it has put in at least a short-term top.  In the metals market, gold (-0.4%) is giving back some of last week’s gains although both silver (+0.2%) and copper (+1.1%) are rebounding after tougher weeks.  Metals prices seem to be pointing to less fear and more hope for economic rebound.

Finally, the dollar is under some pressure this morning, slipping vs. most of its counterparts in both the G10 and EMG blocs.  The euro (+0.25%) is having a solid session although both AUD (+0.4%) and NZD (+0.5%) are leading the G10 pack.   Even NOK (+0.1%) is rallying despite oil’s pullback.  In the EMG bloc, ZAR (+0.8%) is the leader right now, partially on continued gains in platinum and gold’s overall recent performance, and partially on hopes that their presence at the G-7 will get them some tariff relief.  Elsewhere, the gains have been less impressive with KRW (+0.5%) also benefitting from tariff hopes while the CE4 see gains of 0.3% or so.  No tariff hopes there.

It is an important data week with Retail Sales and housing data, but also because the FOMC leads a series of central bank decisions.

TodayEmpire State Manufacturing-5.5
TuesdayBOJ Rate Decision0.50% (no change)
 Retail Sales-0.7%
 -ex autos0.1%
 IP0.1%
 Capacity Utilization77.7%
WednesdayRiksbank Rate Decision2.0% (-25bps)
 Housing Starts1.36M
 Building Permits1.43M
 Initial Claims245K
 Continuing Claims1940K
 FOMC Rate Decision4.5% (no change)
ThursdaySNB Rate Decision0.00% (-25bps)
 BOE Rate Decision4.25% (no change)
FridayPhilly Fed-1.0

Source: tradingeconomics.com

So, Sweden and Switzerland are set to cut rates again, while the rest of the world waits.  Chairman Powell’s comments seem unlikely to stray from the concept of too much uncertainty given current fiscal policies so no need to do anything.  Thursday is a Federal holiday, Juneteenth, hence the early release of Claims data.  I have to say the Claims data is starting to look a bit worse with the trend clearly climbing of late as per the below chart.

Source: tradingeconomics.com

I continue to read stories about the cracks in the labor market and how it will eventually show itself as weaker US economic activity, but the process has certainly taken longer to evolve than many analysts had forecast.  One other thing to remember is that Congress is still working on the BBB which if/when passed is likely to help support the economy overall.  The target date there is July 4th, but we shall see.

Summarizing the overall situation, many things make no sense at all, and others make only little sense, at least based on more historical correlations and relationships.  I think there is a real risk of another sell-off in risk assets, but I do not see a major collapse.  As to the dollar, the trend remains lower, but it is a slow trend.

Good luck

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So Mind-Blowing

Posted on by

On one hand, the chorus is growing
That US debt is so mind-blowing
The ‘conomy will
Slow down, then stand still
As ‘flation continues its slowing
 
But others remind us the data
Does not show a slowing growth rate-a
And their main concerns
Are Powell still yearns
For rate cuts to help market beta

 

As many of us enjoyed the long weekend, it appears it is time to put our noses back to the proverbial grindstone.  I know that as I age, I find the meaning of the Memorial Day holiday to grow in importance, although I have personally been very fortunate having never lost a loved one in service of the nation.  However, as the ructions in the nation are so evident each day, I remain quite thankful for all those that “…gave the(ir) last full measure of devotion” as President Lincoln so eloquently remarked all those years ago.

But on to less important, but more topical things.  A week ago, an X account I follow, The Kobeissi Letter, posted the following which I think is such an excellent description of why we are all so confused by the current market gyrations.  

Prior to President Trump’s second term, I would contend that the broad narrative had some internal consistency to it, so risk-on days saw equity markets rally along with commodities while bond prices would fall (yields rise) and the dollar would sink as well.  Similarly, risk-off days would see pretty much the opposite.  And it was not hard to understand the logic attached to the process.  

But here we are, some four plus months into President Trump’s term and pretty much every old narrative has broken into pieces.  I think part of that stems from the fact that the mainstream media, who were purveyors of that narrative, have been shown to be less than trustworthy in much of what they reported during the Biden Administration, and so there is a great deal of skepticism now regarding all that they say, whether political or financial.

However, I think a bigger part of the problem is that different markets have seen participants focusing on different idiosyncratic issues rather than on the bigger picture, and so there are many mini narratives that are frequently at odds.  Add to this the fact that there continues to be a significant dichotomy between the soft, survey data and the hard, calculated data, with the former pointing toward recession or stagflation while the latter seems to be pointing to stronger economic activity, and the fact that if you ask twenty market participants about the impact of President Trump’s tariff policies, you will receive twenty-five different explanations for why markets are behaving in a given manner and what those policies will mean for the economy going forward.

It is at times like these, when there are persuasive short-term arguments on both sides that I step back and try to look at bigger picture events.  In this category I place two things, energy and debt.  Energy is life.  Economic activity is simply energy transformed and the more energy a nation has and the cheaper it is, the better off that economy will be.  President Trump has made no bones about his desire to cement the US as the number one energy producer on the planet and to allow affordable energy to power the economy forward.  As that occurs, that is a medium- and long-term bullish backdrop.

On the other hand, we cannot forget the debt situation, which is an undeniable drag on economic activity.  Forgetting the numbers per se, the fact that the US debt/GDP ratio is at wartime levels during peacetime (well, US peacetime) with no obvious end to the spending is a key concern.  But it is not just the US with a growing debt/GDP ratio.  Here is a listing from tradingeconomics.com of the G20’s ratios.  (Russia is the bottom of the list but not relevant for this discussion.)

And remember what has been promised by Germany and the Eurozone with respect to defense spending? More than €1 trillion for Germany and it sounds, if my addition is correct, like upwards of €1.7 trillion across the continent.  And all of that will be borrowed, so that is another 22% in Germany alone.  The point is the global debt/GDP ratio remains above 300% for public and private debt.  As government debt grows above 100%, at some point, we are going to see central banks, in sync, clamp down on longer-term yields.  

However they couch it, and however they do it, whether actual yield curve control, through regulations requiring banks and insurance companies to hold more government bonds on their balance sheets with no capital charges, or through adjustments to tax driven accounts like IRA’s and 401K’s, requiring a certain amount of government debt in the portfolio to maintain the tax deferred status, I expect that is what we are going to see.  And even with oil prices declining, which I think remains the trend, inflation is going to be with us for a long time to come as debt will be monetized.  It is the only solution absent a depression.  And every central bank will be in on the joke.  Which takes us to this morning…

As yields were soaring
The BOJ kept quiet
Until yesterday

Apparently, the bond vigilantes have spent the past decades learning Japanese.  At least that is what I conclude from the price action, and more importantly, the BOJ’s recent response in the JGB market. As you can see in the chart below, there has been a significant reversal in 30-year JGB yields with similar price action in both the 20-year and 40-year varieties.

Source: tradingeconomics.com

You may recall that last week, the Japanese government issued 20-year bonds, and the auction went quite poorly, with yields rising sharply (that was the large green candle six sessions ago). Well, it seems that the BOJ (along with the Ministry of Finance) have figured out that the bond situation in Japan is reaching its limits. After all, in less than two months, 30-year JGB yields rose 100 basis points from a starting point of about 2.2%.  That is an enormous move.  Now, if we look at the table above, we are reminded that Japan’s debt/GDP ratio is the highest in the developed world at well over 200%.  In addition, the BOJ owns more than 53% of all JGBs outstanding.  Quite frankly, it is easy to make the case that the BOJ has been monetizing Japanese debt for years.  

As it happens, last week the BOJ held one of their periodic (actually, the 22nd) “Bond Market Group” meetings in which they discuss with various groups of market participants the situation in the JGB market regarding liquidity and trading capabilities and the general functioning of the market.  The two charts below, taken from the BOJ’s website (H/T Weston Nakamura) demonstrate that there is growing concern in the market as to its ability to continue along its current path.

The concern demonstrated by market participants is a clear signal, at least to me, that we are entering the end game.  For all the angst about the situation in the US, with excessive fiscal expenditures and too much debt, Japan has that on steroids.  And while Japan has the benefit of being a net creditor country, the US has the advantage of having both the strongest military in the world and issuing the world’s reserve currency.  As well, the US neighborhood is far less troublesome than Japan’s in East Asia with two potential protagonists, China and North Korea.  All I’m saying is that after decades of kicking the can down the road, it appears that the road may be ending for Japan and difficult policy decisions regarding spending, deficits and by extension JGB issuance are coming soon.

It’s funny, many economists have, in the past, described the US situation as Japanification, with rising debt and slowing growth.  But perhaps Japanification will really be the road map for how to respond to the first true limits on the issuance of government debt for a major economy.  Last night, JGB yields fell across the board, dragging global yields down with them.  The yen (-0.8%) weakened sharply, reversing its trend of the past two weeks, while the Nikkei (+0.5%) rallied.  Perhaps market participants are feeling comforted by the fact the Japanese government seems finally ready to recognize that things must change.  But this is the beginning of that process, not the end, and there will be many twists and turns along the way.  Stay tuned.

Ok, I really ran on, but I feel it is critical for us all to recognize the debt situation and that there are going to be changes coming.  As to other markets overnight, this is what we’ve seen.  Asia was mixed with gainers (Hong Kong, Australia, Singapore) and laggards (China, Korea, India, Taiwan) but nothing moving more than 0.5% in either direction.  Europe, on the other hand, has been the beneficiary of President Trump delaying the tariffs on the EU until July 9th, with all the major indices higher led by the DAX (+0.8%) which also rallied more than 1% yesterday.  Say what you will about President Trump, he has gotten trade discussions moving FAR faster than ever before in history.  US futures, at this hour (6:15) are also pointing nicely higher, more than 1.3% across the board.

We’ve already discussed bond yields where 10yr Treasury yields have backed off by 5bps this morning although European sovereign yields have not benefitted quite the same way with declines of only 2bps on average.  But the trend in all cases is for lower yields right now.  Hope springs eternal, I guess.

In the commodity space, with the new view on tariffs, risk is abating and gold (-1.5%) is being sold off aggressively.  Not surprisingly, this has taken the whole metals complex with it.  As to oil (+0.1%) it continues to trade in its recent $60 – $65 range and while the trend remains lower, it is a very slow trend.

Source: tradingeconomics.com

Finally, the dollar is perking up this morning, not only against the yen, but across the board.  On the haven front, CHF (-0.6%) is sinking and the commodity currencies (AUD -0.6%, NZD -0.8%, SEK -0.6%) are also under pressure.  But the euro (-0.4%) is lower and taking the CE4 with it.  In fact, every major counterpart currency is lower vs. the dollar this morning.

On the data front, this morning brings Durable Goods (exp -7.8%, -0.1% ex-transport), Case Shiller Home Prices (4.5%), and Consumer Confidence (87.0). We also hear from NY Fed President Williams this evening.  Chairman Powell spoke at the Princeton graduation ceremony but said nothing about policy.  I will review the rest of the week’s data tomorrow.

Bonds are the thing to watch for now, especially if we are going to see more active policy adjustments to address what has long been considered an unsustainable path.  The question is, will there be fiscal adjustments that help?  Or will central banks simply soak up the bonds?  While I hope it is the former, I fear it is the latter.  Be prepared.

Good luck

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Quite Excited

Posted on by

The market is now quite excited
As trade talks have been expedited
With Bessent and He
Now speaking, we’ll see
If buyers last night were farsighted
 
However, do not ignore gold
Whose price is a thing to behold
The past several days
There’s been quite a craze
As sellers now rue what they’ve sold

 

Source: tradingeconomics.com

I don’t often lead with a chart, but I think it is worthwhile this morning.  I grabbed this picture at 7:00pm last night, shortly after the news hit that Treasury Secretary Bessent and Trade Representative Greer were heading to Switzerland later this week to sit down with He Lifeng, the Chinese Vice Premier and trade negotiator and begin trade talks.  Prior to that announcement, the barbarous relic had rallied more than $200/oz over the past four sessions, a pretty impressive move for something that has maintained a low overall volatility.  The first explanation of the reversal, which coincided with a sharp gain in equity futures (see chart below) is that all the fear of the world ending with corresponding equity weakness and a need to hold gold, has ended!  Hooray!!!

Source: tradingeconomics.com

Alas, just as I never believed the world was ending before, neither do I believe that everything is suddenly better.  Seemingly, this is all part of the process.  The idea that China could simply accept much of the stuff they produce would not be able to find a home in the US was never going to be the case.  I have no idea how things will work out, and they certainly will take a lot of time to come to some agreement, but it is very positive that the dialog has begun.

On the subject of which side blinked, which is a favorite for the punditry, especially those who despise dislike President Trump and believe this shows weakness on his part, I would note that the Chinese are the ones who have recently reported weaker economic data and last night the PBOC cut their 1-week reverse repo rate by 0.1% and reduced their Reserve Requirement Ratio by 50 basis points, both monetary easing measures to address the ongoing weakness in China.  Neither side benefits from this process in the short-term, but we will need to see the results of the talks, which will take many months I presume, before we know if goals have been achieved.

Away from the story on trade
The Fed story must be portrayed
Alas, it’s quite dull
As Jay and friends mull
The idea rate cuts be delayed

The only other story of note today is the FOMC meeting where they will release their policy statement at 2:00 this afternoon revealing no change in policy, and very likely almost no change in the wording, and then Chairman Powell will face the press at 2:30.  However, given the low probability of any changes, and given nothing regarding trade policy has really changed since they entered their quiet period, it seems unlikely that we will learn anything of consequence from Powell.  Today will be a complete non-event.

However, I cannot help but consider why the futures market appears so convinced that there are going to be rate cuts going forward this year.  As of this morning, the Fed funds futures are pricing a total of 78 basis points of cuts for the rest of this year, so three 25bp cuts as per the below chart from the CME.

Certainly, the data released thus far this year have not indicated the economy is heading into a tailspin.  Of course, there are many analysts calling for a recession to start in Q2 or Q3 as the tariff impacts ostensibly undermine the economy.  It is important to note, however, that these are the same analysts who have been calling for a recession for the past three years.  The boldest calls are for a period of stagflation, with the tariffs simultaneously killing growth and raising prices.

It is entirely possible that we see a recession this year, especially if government spending decreases given its role in supporting recent growth data.  (According to the BEA, Federal government spending in Q1 declined -5.1% while investment in the economy expanded more than 2%.). If this is the path forward, the long-term benefits will be substantial, but they must be maintained.  As well, if this is the path forward, total economic activity in the US will expand substantially and it is not clear that rate cuts will need to be part of that mix. 

Regardless, it seems that today’s activity is less likely to be impacted by the Fed than by any random headlines regarding trade or other administration maneuvers.  So, let’s see how markets have responded to the US-China trade talk news.

The China news came long after the close yesterday so the US markets closed lower on the session, approaching 1% declines, but US futures are currently higher by around 0.7% at 7:15.  In Asia, however, we did see some modest gains although the Nikkei (-0.15%) faded a bit, both China (0.6%) and Hong Kong (+0.15%) managed to rally.  As to the rest of the region, most markets were modestly higher although in a seeming sympathy move on the China news.  In Europe, bourses are softer this morning with the CAC (-0.7%) leading the way and other key indices falling less.  The data releases show Construction PMI softening on the continent as well as weak Eurozone Retail Sales (-0.1%), so I imagine that is weighing on investors’ minds today.

In the bond market, Treasury yields are 2bps firmer this morning but have been trading either side of 4.30% for the past several sessions as traders try to estimate the next big thing.  I see just as many stories about how yields are going to 10% as I do about how they are headed to 2% amid the depression coming, so my take is, we are going to range trade for a while yet.  In Europe, sovereign yields are lower by between -3bps (Germany) and -5bps (Italy) as that softer data is encouraging investors to believe that inflation will continue to decline and the ECB will cut further.

The commodity market has been where the real action is of late with oil (+0.9% today after +2.0% yesterday) rising after comments by two US oil companies that they will not be drilling any more if oil prices stay at these levels.  What I don’t understand is, what will they be doing as they are oil companies?  At any rate, this will be the tension in markets, who can afford to drill and sell oil at lower prices.  I expect we will hear from companies and pundits on both sides of this equation.  I discussed gold above, which has bounced slightly from its lowest levels overnight and I don’t believe anything will derail this train for a while yet.  However, both silver (-0.75%) and copper (-2.6%) are softer this morning, partly based on gold’s slide and partly on the weaker economy story.

Finally, the dollar is modestly firmer this morning, at least against its G10 counterparts with JPY (-0.6%) the weakest of the bunch, followed by SEK (-0.5%) and AUD (-0.3%).  The euro and pound are little changed and NOK (+0.15%) has gained on the back of oil’s strength.  In the EMG block, KRW (-1.1%) and TWD (-1.1%) have both rebounded some from their recent highs (dollar lows) in what seems more like a trading reaction than a change in policies.  Elsewhere in this bloc, though, MXN (+0.2%) is a touch stronger while ZAR (-0.5%) is a touch weaker and CNY is little changed.  There is a story making the rounds today that a well-known currency analyst, Steven Jen, is claiming that there could be as much as $2.5 trillion of excess currency reserves held by Asian nations that they may no longer need.  If this is true and these reserves were sold quickly, it would certainly drive the dollar much lower.  However, it strikes me that given the enormous amount of USD debt that has been issued by Asian companies and countries, and given these countries do not have access to Fed swap lines in emergencies, there is no reason to sell the dollars.  Rather they will simply have a ready supply without having to chase them when repayment and rollovers come due.  I would take this story with a large grain of salt.

Other than the Fed, we see EIA oil inventory data where some drawdowns are anticipated and that is really the day.  We are all awaiting the trade negotiation outcomes and I would say nobody has an inside track there.  Bigger picture, though, I do think the dollar has further to slide.

Good luck

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Very Near Future

Posted on by

The “very near future” is when
The US and China, again
Will restart their talks
Assuming no balks
By either of these august men
 
That’s all that the market required
For buyers to get so inspired
Can this idea last?
Or will it have passed
Ere market resolve has expired

 

While all and sundry have been very confident that President Trump’s attempt to alter the structure of the global economy and world trade to a more beneficial one, in his view for the US, will fail dismally and that we are doomed to stagflation as prices rise and the economy sinks, it seems these same economic analysts have forgotten that there are two sides to the supply/demand equation.  I have written before that despite all the slings and arrows that have been aimed at Trump, the US has a very strong hand in the trade game given it is THE CONSUMER OF LAST RESORT.  Virtually every nation in the world has built an economy designed to be able to manufacture stuff cheaply and sell it into the largest economy in the world.

And US consumers are remarkable in their ability to continue to consume at high levels despite what appear to be significant headwinds, whether high financing costs, limited savings or slowing economic activity.  But a funny thing is happening on the way to this mooted US stagflation, it’s not happening yet.  In fact, as described by economist Daniel Lacalle in his most recent post, it seems that the biggest problem is not that Americans cannot find what they want to buy, it is that they only bought all this stuff because it was cheap.  They will not accept significant price rises and so inventory is building up at factories while ships are stuck with containers full of stuff nobody wants, at the price.  Could it be that President Trump read the room better than the economists?

I use this as preamble to yesterday’s massive equity rebound which was, ostensibly, triggered by comments from Treasury Secretary Bessent that substantive trade talks with China would begin in the “very near future.”  Subsequent soothing comments by the President indicated that the days of 125% tariffs were numbered but there would be tariffs in place.  As well, Mr Trump explicitly said he has no intention to fire Fed Chair Powell, despite his recent diatribe that Powell is always late to the party and should cut rates.  Certainly, I agree the Fed is, and will always be, late to the party as long as they use a data driven approach.  After all, by the time economic change is reflected in the data, whatever is going to change has already done so.  However, I don’t yet see the rationale for cutting rates given the current economic data and the fact that inflation remains a problem.

As of this morning, following significant equity rallies around the world, one might come to believe that all the world’s problems have been successfully addressed.  The fact that one would be wrong in that belief is the best example of ‘the market is not the economy’.  But, hey, let’s take the rallies when they come!

From a market perspective, that was really the big story yesterday and continuing into today.  Flash PMI data is not that exciting, and all the other headlines revolve around the ongoing immigration/deportation issues plus RFK Jr’s edict to remove petroleum-based food coloring from foods.  So, let’s look at the markets and recap the action.

The 2.5% to 3.0% gains in the US were followed by Tokyo (+1.9%) and Hong Kong (+2.4%) performing well but nothing like Taiwan (+4.5%).  The laggard last night was China (+0.1%) with other regional exchanges showing gains between 0.5% and 1.5%.  Net, I suppose everybody was happy.  In Europe this morning, the screens are green as well, with Germany (+2.6%) leading the way followed by France (+2.2%) and the UK (+1.3%).  Again, the trade story appears to be the leading driver.  And, adding to the joy, US futures are also higher between 2.0% (DJIA) and 3.0% (NASDAQ) this morning as of 6:50.  And to think, just two days ago I was assured that the end was nigh.  A quick look at the S&P 500 chart below does give a flavor for just how much volatility we have seen on a day-to-day basis and how narrative changes continue to have huge impacts.

Source: tradingecomics.com

At the same time, Treasury yields have been retracing, lower by -8bps this morning with UK gilts (-6bps) also performing well, although continental European sovereigns are not seeing the same demand with bunds (+3bps) the laggard despite the weakest PMI readings with both Manufacturing and Services below 50.0, lower than last month and far lower than forecasts.  The narrative of money leaving the US and heading back to Europe is certainly appealing, and seems quite reasonable as a long-term metric, but it is not clear to me that it will be driving daily price action in any market.

In commodities, oil (+1.0%) continues to edge higher although it has not yet come close to filling that massive gap lower from the beginning of the month.  

Source: tradingeconomics.com

From a fundamental perspective, fears of a US recession, which remain high, as well as the IMF recently reducing their global growth forecast seem to be undermining the demand side of the equation.  Meanwhile, the opportunity for significant new supply (Iran deal, Russia peace) seems quite real.  I’m no oil trader but it strikes me the risk-reward here is for a further drop in prices.  As to the metals markets, gold (-0.4%) fell more than $100/oz yesterday, so perhaps my view that the parabolic move was too much was correct.  However, I believe this is a short-term, and much needed, correction with the long-term story fully intact.  Meanwhile, silver (+1.4%) and copper (+0.4%) are modestly higher after quiet sessions yesterday.

Finally, the dollar is firmer this morning against most of its counterparts, but this is not a universal situation.  While both the euro and pound have fallen -0.25%, AUD (+0.6%) is showing some oomph as it figures to be one of the key beneficiaries of a trade agreement between the US and China, no matter how far in the future.  Other key gainers are KRW (+0.6%) and CNY (+0.3%), with both clearly benefitting from that same trade story.  But otherwise, the dollar is mostly ascendent.  

An aside here on the yen (-0.4%) which just two days ago traded below the key psychological level of 140 and this morning is back above 142.  It strikes me that this is the first currency that will be reactive to any trade deal.  As you can see from the below, long-term chart of the yen, it has spent the bulk of its time at far higher (dollar lower) levels.  I suspect that any trade deal will include an effort to revalue the yen higher vs. the dollar, perhaps to its longer-term average of around 120.

Moving on to today’s data, we have New Home Sales (exp 680K) and then the Fed’s Beige Book at 2:00pm. I’m not sure when the surveys were taken for the Beige Book, but you can be sure they will express a great deal of uncertainty and discuss how it will reduce economic activity.  You can also be sure that this will be hyped in the press.  But now that everything is better (just look at the stock market) is this old news?

If we try to look past the daily gyrations to the bigger picture, I would contend the following is the case.  Equity markets remain overvalued and are likely to weaken, the dollar is likely to slide as well as foreign investors slowly reallocate funds away from the US.  Quite frankly, the Treasury story is much harder as the interplay between inflation and potential reduced government expenditure is highly uncertain right now, although one will eventually dominate.  Finally, commodities remain far more important than their current relative weight in the global asset basket and I believe they have much further to climb in price.  One poet’s views.

Good luck

Adf

Their Own Ego Trip

Posted on by

The talk of the town is the “Pause”
Which led to much market applause
Though naysayers still
Say Trump’s actions will
Result in bad outcomes…because


But yesterday saw markets rip
And all those who did buy the dip
Are feeling quite smart
When viewing the chart
Of prices, their own ego trip

 

See if you can guess when President Trump posted that there would be a 90-day pause on tariffs for everyone but China.

Source: tradingeconomics.com

By now, you are almost certainly aware that equity markets in the US rebounded massively in the US, with one of the biggest gains on record as the S&P 500 rose 9.5% and the NASDAQ 12.2%.  Of course, that merely retraced the bulk of the losses seen since the beginning of the month.  In fact, the S&P 500 is still lower by about 200 points since then.  Regardless, moods are much brighter today than they were yesterday at this hour.  And those equity gains are global.

I’ve seen several interpretations of the sequence of events and like virtually everything these days, it appears to have a partisan bias to people’s views.  There are those who claim President Trump could not stand the pressure of a declining stock market and “blinked” in the game of chicken he was playing.  There are also those who claim this was part of the strategy all along, essentially moving the Overton Window substantially in his preferred direction and now he is ready to reap the benefits of this move.  

Arguably, there is evidence for both sides of this argument and I suggest we will never really know. Remember, Trump is quite comfortable making outlandish pronouncements as he level sets for a negotiation.  But he is also quite the realist and while I do not believe he was concerned with his personal or family fortune, recognized that the speed of the pain inflicted could be damaging overall.  In the end, it is not clear the rationale matters, the action stands on its own merits.  

But remember this, equity valuations were very high before the decline last week, and were still quite high, although obviously less so, after the decline.  The rebound put them back in very high territory, especially with equity analysts revising profit forecasts lower on the back of the still 10% tariffs being imposed.  A truism is that the biggest rallies in the stock market occur during bear markets.  Keep that in mind as you assess risk going forward.

But let us turn our attention to a player who is not getting much attention these days, the Fed.  Many questioned the Fed’s rate cuts back in Q4 and attributed the moves to a partisan effort to help VP Harris get elected.  Certainly, there is no love lost between Chairman Powell and President Trump.  Of late, though, the commentary has focused on patience regarding any further policy ease as the impacts of Trump’s tariff policies are unknown at this stage.  Yet, it is not hard to read these comments and get a sense that the Fed is going to work at cross purposes to Mr Trump.  

For instance, yesterday, Minneapolis Fed President Neel Kashkari released an essay with the following comments, “Given the paramount importance of keeping long-run inflation expectations anchored and thelikely boost to near-term inflation from tariffs, the bar for cutting rates even in the face of a weakening economyand potentially increased unemployment is higher.  The hurdle to change the federal funds rate one way or theother has increased due to tariffs.”  While the words here don’t appear partisan per se, Mr Kashkari is one of the most dovish FOMC members and dismissed inflation concerns regularly for a long time.  This sudden change is interesting, at the least.  

At any rate, the market, which had been pricing a 50% probability of a rate cut next month just a few days ago and a total of at least 4 cuts this year, is back down to a <20% probability of a cut in May and about 3 cuts this year.  Truly the pause that refreshes.

So, let’s look at how other markets responded to the pause.  Markets everywhere, including China, rallied last night and this morning, with Tokyo (+9.1%) and Taiwan (+9.2%) leading the way in Asia although gains were universal.  Hong Kong (+2.1%) and China (+1.3%) were the laggards with gains between 2.5% and 5.0% the norm.  In Europe, too, equities are flying this morning as the threat of much higher tariffs is removed, at least temporarily, with the UK (+4.6%) the laggard and gains between 5.0% and 6.5% the story there.  Alas, futures this morning, at 7:00am, are pointing lower by -2.0% or so.  Is that profit taking or a harbinger of the day to come?

In the bond market, which has expressly been Trump and Bessent’s main concern, yields are a bit lower this morning, -3bps in 10-year Treasuries.  But the story in Europe is confusing to me, or perhaps not.  German bunds (+6bps) have seen the largest rise while UK Gilts (-10bps) have seen a sharp decline.  Too, Italy (-4bps and Greece (-2bps) have seen yields decline.  Could this be an illustration that bunds are a better safe haven than Treasuries? And now that haven status seems less important today, they are being sold off?  JGB yields (+9bps) are also rising, perhaps on the same notion.  The corroborating evidence is that nobody thinks Gilts are a good investment, so with risk back on, they are in demand given their highest yield in the G10.

In the commodity markets, oil rebounded sharply alongside equities yesterday although it has slipped 2.4% this morning.  I have altered the Y-axis on the chart below to percentages to give an idea of the magnitude of these moves in the past days, especially relative to the past 6 months.  Despite being the most liquid commodity market around (both figuratively and literally), it is far less liquid than bonds or FX or even stocks, so as commodities are wont to do, sometimes the moves are breathtaking.

Source: tradingeconomics.com

As to the metals markets, gold (+1.0%) continues its march higher, recovering more than 5% from the lows Tuesday morning.  I maintain that much of that selling was margin based, with positions liquidated to cover margin calls in other markets.  Now that the panic has passed, demand is likely increased given the new uncertainties.  However, both silver (-0.5%) and copper (-1.3%), which rallied sharply yesterday, have slipped back a bit.  These are different stories.

Finally, the dollar is lower this morning, having yo-yoed like every other market on the tariff news.  CHF (+1.9%) and JPY (+1.4%) are the big gainers in the G10 although the euro (+1.2%) is having a day as well.  However, there are currencies with less pizzazz this morning, notably ZAR (-0.9%), KRW (-0.6%) and MXN (-0.5%), as it remains difficult to know how to proceed going forward.  JPMorgan has a global volatility index which is a useful barometer of how things are going.  As you can see below, it is not surprising that volatility in this space has also risen sharply.

Once again, I return to the idea that President Trump is the avatar of volatility, and you must always remember that volatility can happen in both directions.  While financial assets tend to collapse (yesterday being the exception) when things get out of hand, commodities go the other way as supply interruptions are the big risk. Writ large, volatility simply means a lot of movement.

We finally get some meaningful data this morning with headline CPI (exp 0.1%, 2.6% Y/Y) and Core (0.3%, 3.0% Y/Y) along with the weekly Claims data (Initial 223K, Continuing 1880K).  Given all the focus on the tariffs, though, it is not clear to me what this data will imply on a forward-looking basis.  As we have seen with the Fed getting sidelined by Mr Trump, his tariff policies have also served to overshadow economic data, at least for now.  There are a couple of more Fed speakers and a 30-year bond auction as well.  Interestingly, I expect that auction may be the most important outcome of the day.  Will there be real demand or are investors shying away?

I expect that over the next few months, tariffs will be discussed on a nation-by-nation basis as new deals are struck.  But that will impede any medium-term views on the economy as until we have a much better sense of the end results, it will be difficult to assess things.  The upshot is, we may be entering a period where we chop up and down, but don’t go anywhere until the global trade situation is clearer.  Volatility with no direction is great for traders, less so for investors.  Headline bingo is still the game we are playing.

Good luck and good weekend

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Not Fraught

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The Retail Sales data did nought
To clarify anyone’s thought
‘Bout growth or inflation
While anticipation
Of Jay, for a change, is not fraught
 
Meanwhile, tariffs are, once again
A question of how much, not when
Just two weeks from now
The president’s vow
For more, has disturbed market zen

 

In a remarkable situation, at least these days, there is precious little new news impacting financial markets.  Perhaps that is why equities around the world are rallying, the absence of bad news is seen as good.  Here in the States, the biggest story continues to be the controversy over the deportation of several hundred Venezuelan and Salvadorean gang members that some claim ignored a judge’s order.  I’m confident this will get top billing for at least another day, but after that, we will move on.  However, market related stories are sparser.

For instance, we can look at yesterday’s Retail Sales data, which was not terrible, but not great, as the headline number rose a less than expected 0.2%, but that still translated into 3.1% growth Y/Y.  One of the things weighing on the data was the fact that gasoline prices fell, thus despite modest growth in volume, total dollar sales declined.  The same was true with autos, where allegedly prices declined though volumes remained solid.  (Remember, Retail Sales measures the dollar value of sales, not the quantity of items sold.). At any rate, investors absorbed the data and decided that the recent market declines, to the extent they are a reflection of concerns over rapidly slowing economic activity, were overdone.  The result, happily, is that equities rallied most of the day yesterday and that has followed through around the world overnight.

Alas, the other string of stories in headlines today is the Trump administration’s efforts to determine exactly how they want to implement the promised reciprocal tariffs which are due to be put in place on April 2.  It seems the fact the US trades with over 180 nations, each with their own tariff schedules, makes the details of the proposal difficult to shape and implement.  However, my take is, absent some major shifts by other nations, these tariffs will be imposed.

Ultimately, given the US is the ‘buyer of last resort’ for pretty much every other nation on earth with regards to any of their exports, I expect that there will be a number of nations that choose to adjust their own schedules rather than have diminished access to the US market.  But ex ante, there is no way to determine which nations will blink.

As a testament to just how much things have changed in the market, and just as importantly, the market narrative, the fact that three major central banks are meeting this week with the potential to adjust policy, is basically a footnote.  The FOMC starts their meeting today and tomorrow afternoon they will announce rates are unchanged.  Some attention will be paid to the dot plot, to try to see if the recent discussions of patience translate into higher long-term rate expectations, but quite frankly, it is not clear to me that Chairman Powell can say anything that is going to move markets absent a surprise rate adjustment.  The Fed funds futures market continues to price in basically one rate cut each quarter for the rest of the year at this point.

But before that, this evening the BOJ will announce their latest policy updates and, not surprisingly, there is no anticipation of a move there either.  While there has been much discussion in Japan of how companies will be, on average, increasing pay by 5.46% this year, that has not resulted in any expectations for the BOJ to adjust policy in response.  And in fairness to Ueda-san and his crew, the fact that the yen (-0.3% today) has been relatively stable of late, having rebounded from its dramatic lows last summer and held a good portion of those gains, concerns over a much weaker yen have diminished.

Source: tradingeconomics.com

Looking at the chart above, while I am no market technician, there seem to be several overhead resistance levels starting with that recent trend line.  The absence of concern over a declining yen (rising dollar) will leave the BOJ on hold for a while I think.

And let us not forget Thursday morning, where the BOE will convene, also with no policy changes expected. While GDP remains desultory there, printing at 1.0% Y/Y last week for Q4, inflation refuses to fall to their 2% target and so Governor Bailey is caught between that proverbial rock and hard place.  In such a scenario, no action is the most likely outcome.

Ok, let’s turn to the overnight market activity, which has all investors excited given the fact that markets everywhere are embracing risk today.  A solid day in the US was followed by strong gains throughout Asia (Nikkei +1.2%, Hang Seng +2.5%, CSI 300 +0.3%) with the mainland a little disappointing.  There has been more discussion recently that despite some splashy headlines about more Chinese stimulus, it is less than meets the eye.  That is a view with which I agree.  The exception to this rule was Indonesia (-3.9%) which fell after concerns over slowing growth and a widening budget deficit spooked foreign investors.  In Europe, things are also bright with all markets firmly higher led by Germany (+1.2%) as continued belief in the end of the debt brake has investors anxious to take advantage of all the government spending set to come.  We shall see how that works out, but if the US is the template, it probably has some room to run.  However, all these bourses are higher this morning in a general risk-on mood.  The crimp in the story is US indices are all slightly softer this morning ahead of Housing data.

In the bond market, yields are climbing with Treasury yields up by 1bp and European sovereign yields all higher by 3bps.  Again, this seems to be focused on the mooted extra government spending which is coming down the pike, although yields have backed off the levels seen after the initial announcements as per the below.  In fact, I read a forecast this morning about German bund yields rising to 4% by the end of next year after all the borrowing.

Source: tradingeconomics.com

In the commodity bloc, gold (+0.9%) is unstoppable for now, and taking silver (+1.1%) and copper (+0.4%) along for the ride.  Whatever else is ongoing, it appears that more and more investors have decided that having some portion of their portfolios in the barbarous relic is the right trade. After all, it is higher by more than 15% just since the beginning of the year and more than 40% over the past twelve months.  Oil (+1.1%) is also managing to hold above its recent lows but continues to run into resistance below $70/bbl.  The biggest news today is that Saudi Aramco has seen its stock price falling to 5-year lows, down 50% from its highs of 2022 after cutting dividends earlier this month.

Finally, the dollar is little changed at this hour (7:45), rebounding from modest weakness earlier in the session.  The euro and pound are unchanged, and the yen remains slightly softer.  However, MXN (-0.5%) and KRW (-0.5%) are both feeling the heat of the tariff story.  In the opposite camp, CL (+0.6%) continues to benefit from the rally in copper prices.  The big picture here remains unchanged, with the dollar likely to remain on its back foot as capital flows toward Europe’s government spending bonanza and away from the US, which appears to be pushing for fiscal tightness. 

On the data front, this morning we see Housing Starts (exp 1.38M) and Building Permits (1.45M) at 8:30 then at 9:15 we get IP (0.2%) and Capacity Utilization (77.8%).  With the Fed meeting ongoing, the only headlines will come from the White House, and those are virtually random these days.  Tight fiscal and loose monetary policy tends to weaken a currency and given that is the best description of the US these days, it remains my default position.

Good luck

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